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Thursday, February 25, 2010

Can Anyone Beat the Market?

So far this year, I have made two posts which point out that both actively managed mutual funds and individual investors have a difficult time beating the market. Well, continuing on that topic, here are two more articles which show that trying to beat the market is likely a waste of time. The first is titled, " How to Squander $170 Billion", and in it, we learn that plan sponsors, people in charge of pension funds, do a horrible job of picking investment managers. They hire and fire managers at the wrong times, thereby costing their funds billions of dollars. According to Professor Scott Stewart,

“Plan sponsors never make their money back. If they simply went on vacation, they could save their clients $170 billion – and that doesn’t count transaction costs.”

And then there is this report, Evaluation of Active Management of the Norwegian Government Pension Fund — Global, which is a pretty technical report, so I will summarize the findings. The Norwegian Government runs a sovereign wealth fund which is one of the largest in the world, with about $430 billion thanks to oil revenues. The fund spends considerable time and effort managing its assets, with an internal staff of 249 employees and hundreds of outside investment managers. Last year, the fund hired three academics to evaluate its performance, and they produced the report referenced above. Their conclusion is that "the overall behavior of the Fund is very similar to an index fund", which begs the question, why pay for all the staff and investment managers if your performance ends up just mimicking the market?